Prosecutors, Gambling and Dead Horses

Should federal prosecutors who settled a tax fraud case with the New York Racing Association back in 2003 (amended in 2005) be kicking themselves? Besides commitments typical of criminal settlement agreements (called deferred prosecution agreements), to improve internal control and governance, this one required the NYRA to continue its best efforts to install gambling machines at the track. It finally did so last year and the results have included the deaths of 21 horses during the winter meet.

Gambling is a controversial topic and New York State politicians had in 2003 just begun a push to expand the kinds of gambling that are legal in the state, starting with video gaming machines at horse racetracks. Why federal prosecutors settling a criminal tax suit should have anything to say about the NYRA’s role in advancing this agenda is not clear. Prosecutors did not explain their reasoning when signing the DPA.

In any event, the NYRA worked earnestly to move its gambling program along amid growing political and legal controversy in the state over gambling. It finally prevailed, opening a gambling emporium at the Aqueduct track in Queens in October 2011. In the ensuing season, an astonishingly high number of horses — 21 — died while racing.

In March, Governor Andrew Cuomo formed a task force to investigate and in May took state control over the track from the NYRA. The task force released its report last week identifying numerous causes for the deaths and prescribing extensive reforms of the NYRA and Aqueduct operations. Among the culprits: casino funding was allocated to massively increase awards to owners of winning horses in lower-level claiming races.

The casino channels 6.5% of its profits to purses, totaling $14.8 million during the 2011 winter meet—a “major infusion of cash,” the report said. Purses for lower level claiming races doubled in raw terms and spiked in comparison to claiming prices. For example, $7,500 claiming horses competed for purses of up to $30,000 and $40,000. The horses were thus devalued: you made much more from the purse than from the claim.

Run the horses harder, run them to death, if necessary. Of the 21 horses that died 17 deaths occurred in claiming races. The report concluded that “inadequate protection was afforded to this class of horse.” The purse-to-claim ratio should never exceed 1.6, the report said, such that the value of the horse is about equal to the winner’s share of the purse. The actual ratios—as much as 5.3:1—contributed to the culture of neglect requiring attention.

We can’t blame the prosecutors who signed the DPA that bound the NYRA to continue its commitment to adding a casino at the track. Nor can one say how much of a role the DPA’s commitment played in the NYRA’s quest to deliver a casino and related revenues to the track. And certainly few could foresee that adding such revenue would inflate purses in claims races to skew incentives so inhumanely.

But a lesson remains in this for DPAs, which is that prosecutors may ask defendants to sign agreements containing terms that on their face have no connection to the alleged crimes and no role in related deterrence or compliance. Critics are clamoring to get prosecutors out of the business of directing internal changes at corporate defendants. The NYRA case adds a sad bit of weight to that side of the argument.